UK: Single Source Contract Regulations - Recent Developments

The UK defence sector continues to be subject to price
regulation and scrutiny in respect of single source defence
contracts. As outlined in our previous article titled '
Single Source Contract Regulations - change on the
horizon', the Single Source Regulations Office
(SSRO) recommended several potentially significant
amendments to the Single Source Contract Regulations 2014
(Regulations) in January 2018.

Following further engagement with stakeholders, the Secretary of
State for Defence (Secretary of State) has not yet
accepted all the recommendations made by the SSRO, but has agreed
to make several amendments to the Regulations which largely relate
to:

exemptions/exclusions from the scope
of the Regulations;

amendments to the contract price of
an existing qualifying defence contract
(QDC);

calculation of the relevant contract
value by the contracting authority;

reporting obligations under the
Regulations; and

adjustments to the contract price of
an existing qualifying sub-contract (QSC).

Those amendments which have not already come into force will do
so on 1 September 2019.

A less challenging approach - for now

The amended Regulations are perhaps most notable for what they
do not include. The SSRO's recommendations were quite
wide-reaching - proposing, in essence, an increase in the number of
contracts falling within the scope of the Regulations and a
broadening of the powers of the SSRO. Key industry players had
concerns that the SSRO's recommendations went too far, and
while the Secretary of State has taken these concerns into account
to date, further amendments to the Regulations may still be made in
the future in order to give effect to the intent behind the
recommendations of the SSRO.

Overview

The Defence Reform Act 2014 and the Regulations established a
regulatory framework in respect of single source defence contracts
(i.e. contracts which are not competed) in the UK, which are not
covered by the Defence and Security Public Contracts Regulations
2011. The UK defence sector continues to be subject to price
regulation and scrutiny in respect of single source defence
contracts under this regulatory framework.

As outlined in our previous article titled '
Single Source Contract Regulations - change on the
horizon', the SSRO published its recommendations in January
2018 (issued in June 2017) which consisted of potentially
significant and challenging amendments to the Regulations
including, for example, substantially reducing the financial value
threshold for QSCs, amending the application of the Regulations to
contract amendments, and extending the powers of the SSRO.

Although many of these recommendations have not yet been
implemented by the Secretary of State, several recent amendments
have been made to the Regulations or, otherwise, will be made on 1
September 2019, and further guidance has recently been published by
the SSRO, as outlined in further detail below. The Secretary of
State has taken the concerns of industry into account to date but
further amendments to the Regulations may still be made in the
future in order to give effect to the intent behind the
recommendations of the SSRO.

Amendments to the Regulations

The Single Source Contract (Amendment) Regulations 2018 and the
Single Source Contract (Amendment) (No. 2) Regulations 2018 have
come into force and make several amendments to the Regulations
(2018 Amendment Regulations).

The 2018 Amendment Regulations address various drafting
deficiencies and inconsistencies. However, in addition, they also
made the following amendments:

Exemptions/Exclusions

The criteria of the exemption for
contracts made within the framework of an international
co-operative defence programme have been narrowed;

The exclusion of contracts made
wholly for the purposes of intelligence activities has been
replaced with an exclusion of contracts which would require the
disclosure of information which the Secretary of State considers
would create a risk to national security;

An exclusion has been introduced
which excludes new contracts which replace previous contracts
(which were not QDCs) where such new contracts are in all material
respects identical to, and ensure the continuation of the
contractual obligations contained in, the previous contracts;

Pricing Amendments

The pre-existing method for
re-pricing a QDC has been replaced with a new Schedule which sets
out how the price of a QDC must be re-determined depending on the
nature and the number of the amendments being made to the contract,
and depending on the pricing method used (e.g. whether the
cost-plus method is used). Modifications were also made to ensure
that this Schedule will also apply in relation to the re-pricing of
QSCs; and

A reference must now also be made to
the SSRO for determination no later than 6 months after a contract
is amended to become a QDC, or if any amendments are made to a
contract in specified circumstances.

Further Amendments on the Horizon

The Single Source Contract (Amendment) Regulations 2019
(2019 Amendment Regulations) come into force on 1
September 2019 and will make several amendments to the
Regulations.

In addition to addressing a number of inconsistencies and
improving the clarity of the Regulations, the 2019 Amendment
Regulations will make the following amendments:

Calculating Contract Value

The time limits identifying which
contracts constitute a series of contracts entered into for the
purpose of fulfilling the relevant requirement will be removed.
Contracts that are entered into for the purpose of fulfilling the
relevant requirement will be considered as a series of contracts
that must be valued in aggregate, regardless of when such contracts
are entered into (unless an exemption under the Regulations
applies);

Reporting

New reporting obligations will be
introduced to ensure greater transparency of the supply chain which
will apply if the primary contractor enters into a sub-contract
with a value of at least GBP15,000,000; and will require that a
primary contractor submits the following where it has assessed that
a sub-contract would not be a QSC:

the outcome of the negative
assessment;

confirmation of whether the award of
the contract is not the result of a competitive process; and

confirmation of whether that contract
enables the performance of contracts other than a QDC or QSC;

Where the value of the proposed
contract is at least GBP15,000,000, a record of the reasons relied
upon to justify a negative assessment will need to be kept as part
of the existing record-keeping requirement in the Regulations;

The relevant records for a QSC will
need to be kept for two years after the contract completion date or
the date on which a contract ceases to be a QSC; and

Pricing Adjustments

Where an adjustment to the contract
price of a QSC is required under the Regulations, the contract
price will not be adjusted by that amount. Instead a payment for
that amount will need to be made by the Secretary of State to the
sub-contractor or by the sub-contractor to the Secretary of State,
as appropriate.

Publication of SSRO Guidance

The SSRO has continued to publish guidance which should be
considered alongside the regulatory framework including guidance
on:

the baseline profit rate and its
adjustment which details how the contract profit rate for any QDC
must be calculated, including with reference to the updated 2019/20
baseline profit rate which is 7.63 percent; and

allowable costs.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.

To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access

No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq

No, please do not send me promotional communications from Mondaq

Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions